Water Co. owns 80% of the outstanding common stock of Fire Co. On December 31, Year
3, Fire sold equipment to Water at a price in excess of Fire’s carrying amount but less than
its original cost. On a consolidated balance sheet at December 31, Year 3, the carrying
amount of the equipment should be reported at

Answer (C) is correct.
In consolidated financial statements, the effects of intraentity transactions
should be eliminated. The original amount recorded for the acquisition
by Water Co. of the equipment from Fire Co. was the carrying amount on
Fire’s balance sheet plus the gain on the sale. In the consolidated financial statements, the equipment should be reported at the amount previously recorded on Fire’s balance sheet. This amount is the original
cost recorded by Water minus the gain recognized by Fire when the
transaction took place.